UNITED STATES OF AMERICA
Before the
SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934
Release No. 48296 / August 7, 2003

ACCOUNTING AND AUDITING ENFORCEMENT
Release No. 1832 / August 7, 2003

ADMINISTRATIVE PROCEEDING
File No. 3-11208

In the Matter of

Cutter & Buck Inc.,

Respondent.

:::::::

ORDER INSTITUTING PUBLIC CEASE-AND-DESIST PROCEEDING, MAKING FINDINGS, AND ISSUING A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission ("Commission") deems it appropriate that a public cease-and-desist proceeding be, and hereby is, instituted pursuant to Section 21C of the Securities Exchange Act of 1934 ("Exchange Act") against Cutter & Buck Inc. ("Cutter," the "Company," or "Respondent").

II.

In anticipation of the institution of these proceedings, Respondent has submitted an Offer of Settlement (the "Offer"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of the Commission, or to which the Commission is a party, and without admitting or denying the findings herein, except as to the Commission's jurisdiction over it and the subject matter of these proceedings, Respondent consents to the entry of this Order Instituting Public Cease-and-Desist Proceeding, Making Findings, and Issuing a Cease-And-Desist Order ("Order").

III.

On the basis of this Order and Respondent's Offer, the Commission finds that:

A. Summary

1. This matter involves false financial reporting by Cutter & Buck Inc., a Seattle-based manufacturer of high-end sportswear. In the closing days of the fiscal year ended April 30, 2000, Cutter made substantial shipments to three distributors, recognizing a total of $5.7 million in revenue for the sales. In fact, the purported distributors were acting only as stocking warehouses for Cutter, and thus revenue should not have been recognized. Cutter retained full responsibility for finding customers to purchase the products, and the distributors had no obligation to pay for the goods until the products were sold to customers provided by Cutter. When Cutter failed to find enough customers to purchase the products from the three distributors, the distributors returned the unsold goods to Cutter. In order to conceal the improper distributor deals, former members of Cutter's management took steps to conceal the product returns.

2. As a result of the improper revenue recognition, Cutter artificially inflated its reported revenue by approximately 12% for the fourth quarter of Fiscal 2000 and 4% for the fiscal year.

B. Respondent

3. Cutter & Buck Inc. is a Washington corporation headquartered in Seattle, Washington. The Company designs and distributes upscale sportswear. The Company's common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act, and has been quoted on the Nasdaq Stock Market since the Company's 1995 initial public offering.

C. Background

4. Cutter is an upscale sportswear company founded in 1990 that sells, among other things, logo-bearing sports shirts sold at golf tournaments and distributed at corporate events. During the relevant period, the Company sold its products primarily through four channels: golf pro shops and resorts, corporate accounts, specialty retail stores, and Company-owned retail stores.

5. For the fiscal year ended April 30, 2000, the Company reported revenue of $152.5 million and earnings of $10.6 million, an increase of 42% and 33% respectively over fiscal year 1999. The Company reported revenue of $54.6 million for the fourth quarter, a 35% increase over the fourth quarter of Fiscal Year 1999.

D. Cutter's Improper Revenue Recognition For Shipments To Warehouses

6. Since at least 1995, Cutter had a practice of shipping products in advance of the shipment date requested by the customer. Though the practice originated out of legitimate business concerns, such as management of the Company's warehouse operations and the Company's desire to beat its competitors to the marketplace, in later years the Company engaged in early shipments primarily to meet analysts' revenue expectations. By 2000, the practice had grown substantially, with the Company "early shipping" several million dollars in products each quarter. As a consequence of essentially "borrowing" from the next quarter's sales, Cutter began each quarter with a sales deficit. This was particularly problematic going into the fourth quarter of Fiscal Year 2000.

7. In April 2000, with the end of the fiscal year rapidly approaching, Cutter faced a revenue shortfall. In order to make up for the shortfall, the Company shipped $5.7 million of goods to three purported distributors and recognized the revenue in the quarter ended April 30. In actuality, these distributors acted as warehouses. They were wholly reliant on Cutter to find customers to purchase the products, and the distributors had no ability or obligation to pay for the products until they were sold to the ultimate customers. As a result, the revenue should not have been recognized.

Origins of the distributor deals

8. Cutter first shipped goods to a distributor at the end of the fiscal year ended April 30, 1999. At the time, the use of a distributor was viewed by sales personnel as a legitimate means of remedying historical shipment problems at the Company. The Company's normal practice was to close its main warehouse at the end of each fiscal year for a physical inventory count, resulting in delayed shipments, some lost sales, and damaged customer relations.

9. In April 1999, Cutter shipped $774,000 of inventory to a distributor in Southern California and recognized revenue upon shipment. Under the agreement with the distributor, Cutter would locate customers and forward orders to the distributor for fulfillment. Moreover, Cutter did not pay commissions to its sales staff for the shipment to the distributor; rather, salespersons were paid commissions only when the distributors shipped the products to customers found by the salespersons.

10. By the end of Fiscal Year 1999, the distributor had returned about $200,000 in unsold merchandise to Cutter, and paid Cutter only for the products it had successfully sold.

Expansion of the distributor shipments in April 2000

11. Notwithstanding its inability to move $200,000 of the $774,000 in inventory sold through its distributor during the prior year, Cutter determined to substantially expand its distributor program. Facing a potential revenue shortfall, the Company shipped $5.7 million worth of inventory to three separate distributors in the last few days of Fiscal Year 2000. The Company recognized revenue upon shipment.

12. None of the three distributors had the financial ability to pay for the volume of products Cutter shipped to them. Nor, under their agreements with the Company, did the distributors have the ability or right to sell the products without Cutter providing customers to them. A Cutter sales vice president verbally assured the distributors that they had no obligation to pay for any of the goods until customers located by Cutter paid the distributors. One distributor received a written side letter from Cutter expressly providing: "I promise you that you will not be expected to pay for product until we have sufficiently sold the merchandise [and] you have been paid for these invoices."

13. As had been the case the prior year, Cutter paid no commissions to its sales staff for the initial shipment to the distributors. Instead, Cutter paid commissions to its salespersons only when the distributors shipped the products to customers found by the salespersons.

14. Under Generally Accepted Accounting Principles ("GAAP"), revenue cannot be recognized if the seller has a continuing obligation to perform. Nor can revenue be recognized if the seller has no reasonable expectation of being paid. Because Cutter had a continuing obligation to perform, and the distributors' obligation to pay for the goods was contingent on Cutter's providing customers for the products, the Company's recognition of revenue for the shipments was improper under GAAP.

Returns from distributors

15. Cutter's sales force failed to deliver enough customers to the three distributors to fill the orders, and by Fall 2000 most of the inventory remained unsold. Cutter arranged for the distributors to return approximately $3.8 million of unsold products to the Company. In order to conceal the improper transactions from Cutter's outside auditors and shareholders, members of Cutter's management took steps to hide the unpaid receivables and disguise the magnitude of the product returns. Among other things, former members of Cutter's management directed that the returns be spread over multiple sales divisions in the Company's accounting records (even though the entire shipment had originally been credited to the Company's corporate sales division).

16. Rather than restating its false financial statements from Fiscal 2000 to correct the improper revenue recognition, Cutter improperly deducted the returns from the revenue reported in Fiscal 2001, and reported false information about the magnitude and nature of the returns.

E. Subsequent Events

17. In late July 2002, following a change in management, Cutter's new management learned about the improper distributor transactions. The Company began an internal investigation in early August 2002. The Company's Chief Financial Officer resigned from the Company, and the Company's controller was terminated. On August 12, 2002, the Company announced that it would restate its financial statements for fiscal years 2000 and 2001. The announcement caused Cutter's stock price to drop from $4.02 to $3.44, or 14%, the following day.

18. In October 2002, in its Form 10-K for the fiscal year ended April 30, 2002, the Company restated its audited financial statements for Fiscal Years 2000 and 2001. The Company reported that the restatement resulted from the improper recognition of revenue for shipments to distributors in April 2000, as well as from the Company's practice of shipping products in advance of the customer's requested shipment date.

F. Legal Conclusions

19. As a result of the above conduct, for the fiscal years ended April 30, 2000 and April 30, 2001, Cutter failed to file with the Commission accurate and complete reports, and filed reports that failed to include material information necessary to make its statements not misleading. The improper recognition of revenue for the three distributor deals in April 2000 led to a 12% overstatement of revenue for the fourth quarter of Fiscal 2000 and a 4% overstatement for the fiscal year, and the subsequent product returns were improperly concealed in the Fiscal 2001 annual report.

20. In addition, the Company failed to make or keep books, records and accounts that, in reasonable detail, accurately and fairly reflected its transactions and dispositions of assets, and failed to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit the preparation of financial statements in conformity with GAAP.

21. Based on the foregoing, the Commission finds that the Company violated Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.

IV.

In view of the foregoing, the Commission deems it appropriate to accept the Offer submitted by Respondent. Accordingly, IT IS HEREBY ORDERED pursuant to Section 21C of the Exchange Act that Respondent Cutter shall cease and desist from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-1 thereunder.

V.

In determining to accept the Offer, the Commission considered remedial acts promptly undertaken by Respondent and cooperation afforded the Commission staff.